I. Market Overview: Volatile Consolidation Ahead of Policy Signal
On August 21, U.S. equities traded in a narrow range and closed lower: the Dow -0.25%, Nasdaq -0.45%, and S&P 500 -0.27%. Walmart’s earnings miss weighed on retail, while tech shares stabilized after two days of heavy swings. Defensive sectors attracted inflows, and the VIX edged higher. Investors remain focused on Fed Chair Powell’s Jackson Hole address on Friday for directional clarity.
II. Key Data: Labor Market Cooling, Economy Still Expanding
Labor Market: Initial jobless claims rose to 235k (vs. 230k expected), the highest since February. Continuing claims climbed to 1.97M, the highest since January 2021, signaling weaker reemployment trends. However, layoffs remain historically low, not yet recessionary.
Economic Expansion: The composite PMI rose to 55.4 (highest since Dec 2024). Manufacturing PMI jumped to 53.3 (highest since May 2022, signaling recovery), while services PMI eased to 55.4 but stayed firmly in expansion. Private-sector growth momentum remains robust.
Inflation Signals: Input costs hit a three-month high, with goods and services prices rising at the fastest pace in three years. This pressured Fed cut expectations—September rate cut odds fell from 82.4% to 73.6%.
III. Policy & Market Dynamics: Fed Division, Powell in Focus
Internal Divergence: Former St. Louis Fed President Bullard called for a 100 bps cut in September, while Chicago Fed’s Evans and Kansas City Fed’s George expressed skepticism. This divergence adds uncertainty, leaving Powell’s message as the key guide.
Liquidity Signals: The Fed’s reverse repo facility shrank to $20–30B, a four-year low, indicating tighter liquidity and no buffer from QT. Historical precedent suggests September or October cuts remain likely.
Bond Market Reaction: The 10Y Treasury yield rose above 4.3%, while the 2Y rose faster, deepening the inversion. A dovish Powell could pull short rates down quickly; a hawkish stance could spark further equity downside.
IV. Corporate Highlights: Mixed Earnings Driving Divergence
Walmart (WMT): Q2 revenue and U.S. same-store sales beat expectations (+4.6% vs. +4.0%), e-commerce sales +26%. But EPS fell short ($0.68 vs. $0.74) on tariffs and legal costs, the first profit miss in three years. Shares dipped, though analysts see weakness as a buying opportunity given raised full-year guidance.
Coty (COTY): Despite strong fragrance demand, weaker retailer orders and U.S. production relocation hit margins. Shares plunged to 52-week lows; near-term outlook remains challenging.
Tesla (TSLA): Returned to a consolidation range; no new catalysts from Robotaxi or FSD updates. Stock likely to follow broader market moves in the short term.
Delta Air Lines (DAL): Shares fell for a third day after a Boeing 737 part failure incident raised safety concerns. Historically, pullbacks to the 50DMA have provided buying opportunities; technical support levels worth watching.
V. Technicals & Strategy: Defensive Positioning, Awaiting Catalyst
Technical Signals: The S&P 500 closed with a doji, showing balance between bulls and bears. Goldman Sachs and JPMorgan view the tech pullback as a buying opportunity. Nasdaq 100 trades at 27x forward P/E—above average but still supported by earnings momentum.
Flows & Seasonality: Momentum baskets near oversold levels; historically, after a -10% five-day drop, rebound odds are 80% in the following week. But reduced buybacks and late-August seasonality add caution.
Mid-Term Outlook: Since 1970, when the Fed delayed cuts for 5–12 months, the S&P averaged +13% returns (10 out of 11 cases positive). A dovish Powell could spark a rebound; a hawkish tone could drive tech-led pullbacks that later create buying opportunities ahead of NVIDIA earnings and potential September cuts.
VI. Investment Guidance: Balanced Approach, Awaiting Clarity
Short-Term: Buy selectively into oversold high-beta tech (esp. AI), but keep stops tight. Avoid tariff-sensitive retail/manufacturing stocks.
Medium-Term: Watch September Fed decision and NVIDIA/Apple earnings—potential triggers for renewed equity allocation. Use pullbacks to accumulate defensives (staples, healthcare).
Risks: Hawkish Powell, persistent weak data, or escalation in geopolitical tensions.
Bottom Line: Short-term volatility reflects policy uncertainty, but medium-term positioning is improving as valuations reset and earnings remain resilient. Adopt a defensive-offensive balance and wait for catalysts to unlock trend opportunities.
